Economic Reform In Eastern Europe And Its Effects on the Economies of Czechoslovakia and Hungary
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This paper seeks to evaluate the economic model of planned economies, in order to better understand what economic realities Eastern European countries must overcome. The Velvet Revolution in Czechoslovakia and the Quiet Revolution of Hungary have installed new governments who are eager move toward market based economies. The debate over which economic system should replace communism shadows over the issue of reform in Eastern Europe. The costs of reform measured by a loss of social welfare poses new political challenges for leaders in Eastern Europe. Czechoslovakia has a stable structural base, and a finance ministry that is pursuing a monetarist approach to fiscal policy. Hungary, albeit debt burdened, has the most liberal investment policies of all eastern bloc countries. Western investors flock to the markets of Eastern Europe, attracted by the potential of these newly liberalized countries. Several conclusions can be drawn. First, it has become apparent that communism failed to meet market demands. A people long resentful of communist political repression have opted to give capitalism another try. Perestroika offered a way out so they leapt at the opportunity for reform. Second, the economic model to which these countries strive will be market based. Despite monetarist influences from Western nations and institutions, some degree of socialism will remain. The people of Eastern Europe do not wish to experience the stark social inequalities of the United States, rather they look toward the prosperous social democratic nations of Western Europe as economic models. Several options present themselves as to how to privatize national companies. The people of Eastern Europe do not want foreign investors owning all their factories, yet the low domestic capital accumulation is insufficient to privatize all that the state owns. Newly formed governments are challenged with privatizing the industrial sector while at the same time maintaining a high level of social welfare. While the long term potential of the market in Eastern Europe is lucrative, western investors must be aware of the risks involved.